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8. SHAREHOLDERS' EQUITY (DEFICIENCY) | 9 Months Ended
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Sep. 30, 2014
Notes to Financial Statements |
NOTE 8. SHAREHOLDERS' EQUITY (DEFICIENCY) | The Company’s Board of Directors may, without further action by the Company’s stockholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of such preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of our common stock. Furthermore, the Board of Directors could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock. Convertible Series A Preferred Stock The Company has authorized 1,000,000 shares of Convertible Series A Preferred Stock, $0.01 par value. At September 30, 2014 and December 31, 2013, there were 510,000 shares issued and outstanding, respectively. The Convertible Series A Preferred Stock is convertible at the rate of one share of common stock for one share of Convertible Series A Preferred Stock. Convertible Series B Preferred Stock The Company has authorized 4,000 shares of Convertible Series B Preferred Stock, $1,000 stated value, 7.5% Cumulative dividend. At September 30, 2014 and December 31, 2013, there were no shares issued and outstanding, respectively. Common Stock During the nine months ended September 30, 2014, the Company issued 222,947 shares of common stock valued at approximately $77,111 for professional services rendered. In addition, the Company issued 24,714 shares of common stock valued at $9,000 to Harold Paul, Director, as payment for legal services rendered. The Company also issued 380,000 shares to the Rolyn Companies, Inc. (“Rolyn”) for labor and services support valued at $180,951 of which 230,000 shares valued at $128,000 were recorded as common stock to be issued at December 31, 2013. (See Note 9). In addition, the Company issued 76,226 shares valued at $25,000 to a consultant for services rendered for the nine months ended September 30, 2014. During the nine months ended September 30, 2014, the Company issued 78,125 shares as consideration for payment of accrued compensation to the CEO amounting to $25,000. During the quarter ended September 30, 2014, the Company sold 377,778 shares of common stock at $.27 per share for gross proceeds of $102,000. In connection with the sale, the Company incurred a cash finder fee in the amount of $3,060 in addition to a finder’s fee paid in common stock of 11,332 shares valued at $3,060. During the quarter ended September 30, 2014, the Company sold 1,652,311 equity units. Each unit consisted of 1 share of common stock and 2.5 warrants. The warrants have an exercise price of $.29 per share and a term of five years. Gross proceeds to the Company amounted to $478,313 net of expenses. In connection with the sale, the Company incurred a cash finder’s fee in the amount of $47,847 in addition to a finder’s fee to be paid in common stock of 49,569 shares valued at $14,375. Stock Options The Company issued 20,000 options valued at $3,000 to a director in January 2013. The options have an exercise price of $0.15 per share. The options expire in January 2023. The options were valued using the Black-Scholes model using the following assumptions: volatility: 343%; dividend yield: 0%; zero coupon rate: 0.25%; and a life of 10 years. The Company issued 20,000 options valued at $8,723 to a director in January 2014. The options have an exercise price of $0.44 per share. The options expire in January 2024. The options were valued using the Black-Scholes model using the following assumptions: volatility: 233%; dividend yield: 0%; zero coupon rate: 1.72%; and a life of 10 years. The following table summarizes stock options outstanding as of September 30, 2014:
|  | September 30, 2014 |
|  | Number of Options |  |  | Weighted Average Exercise Price |
Outstanding, January 1, 2014 |  |  | 60,000 |  |  | $ | 1.42 |
Granted |  |  | 20,000 |  |  |  | .44 |
Exercised |  |  | - |  |  |  | - |
Outstanding, September 30, 2014 |  |  | 80,000 |  |  | $ | 1.17 |
Options outstanding and exercisable by price range as of September 30, 2014 were as follows:
Outstanding Options |  |  | Average Weighted |  |  | Exercisable Options |
Range |  |  | Number |  |  | Remaining Contractual Life in Years |  |  | Number |  |  | Weighted Average Exercise Price |
$ | 0.05 |  |  |  | 20,000 |  |  |  | 6.27 |  |  |  | 20,000 |  |  | $ | 0.05 |
$ | 2.10 |  |  |  | 40,000 |  |  |  | 5.27 |  |  |  | 40,000 |  |  | $ | 2.10 |
$ | 0.44 |  |  |  | 20,000 |  |  |  | 9.26 |  |  |  | 20,000 |  |  | $ | 0.44 |
Stock Warrants The Company issued 250,000 warrants valued at $37,495 to a consultant in January 2013. The warrants have an exercise price of $0.15 and expire in January 2018. The warrants were valued using the Black-Scholes model with the following assumptions: volatility: 343%; dividend yield: 0%; zero coupon rate: 0.25%; and a life of 5 years. During the year ended December 31, 2013, the Company issued 7,611,000 warrants in connection with convertible debt units and 1,014,800 warrants to the placement agent (see Note 6). These warrants have an initial exercise price of $0.30 per share and expire July 31, 2018. In June 2013, the Company issued 100,000 warrants with an exercise price of $.261 per share to a consultant for services. The warrants were valued at $54,767 using the Black-Scholes model with the following assumptions: volatility, 245%; dividend yield, 0%; zero coupon rate, 0.25%; and a life of 5 years. On September 26, 2013, the Company’s Chief Financial Officer, Christopher Chipman, was granted 300,000 warrants. The warrants have a term of five years and vest 100,000 upon the grant date, 100,000 on September 26, 2014 and 100,000 on September 26, 2015. The exercise price of the warrant is $0.77 per share based on the volume weighted average price of the Company’s common stock for the five days prior to the grant date. If employment is terminated, the terms of any then outstanding warrant held by the holder shall extend for a period ending on the earlier of the date on which such warrant would otherwise expire or three months after such termination of employment and the warrant shall be exercisable to the extent it was exercisable as of the date of termination of employment. Any unvested warrants shall be deemed null and void. The Company utilized the Black-Scholes method to fair value the 300,000 warrants received by this individual totaling $208,022 with the following assumptions: volatility, 179%; expected dividend yield, 0%; risk free interest rate, 1.43%; and a life of 5 years. Effective July 18, 2014, Chris Chipman resigned from his position of Chief Financial Officer of the Company and accordingly, his unvested share of warrants were deemed to be null and void. During the quarter ended September 30, 2014, the Company reversed out the equity based compensation for the accrued but not vested portion of the warrants in the amount of $51,000 that was previously expensed. On February 11, 2014, as part of the employment agreements entered into with its three executive officers (CEO, President and COO), the Board of Directors approved the grant of 3,000,000 stock warrants to each of them as executive compensation. The warrants have a term of five years and vest as follows: 1,000,000 warrants will vest upon issuance; 1,000,000 warrants will vest as of February 11, 2015, and 1,000,000 warrants will vest as of February 11, 2016. The exercise price of the warrants is $0.30 per share based on the closing price of the Company’s common stock on the grant date of $0.32. If employment is terminated, the terms of any then outstanding warrant held by the holder shall extend for a period ending on the earlier of the date on which such warrant would otherwise expire or three months after such termination of employment and the warrant shall be exercisable to the extent it was exercisable as of the date of termination of employment. Any unvested warrants shall immediately vest on termination. The Company utilized the Black-Scholes method to fair value the 3,000,000 warrants received by these individuals totaling approximately $952,000 for each executive with the following assumptions: volatility, 233%; expected dividend yield, 0%; risk free interest rate, 1.54%; and a life of 5 years. The grant date fair value of each warrant was $0.32. Effective September 25, 2014, the President and COO resigned from their positions with the Company and accordingly, the remaining unvested warrants immediately vested. The Company recognized equity based compensation of approximately $1,904,000 in connection with the vested warrants for the President and COO for the nine months ended September 30, 2014. On February 11, 2014, the Company’s Board of Directors approved the granting of 300,000 stock warrants to its CFO as incentive compensation. The warrants have a term of five years and vest as follows: 100,000 warrants will vest upon issuance; 100,000 warrants will vest as of February 11, 2015, and 100,000 warrants will vest as of February 11, 2016. The exercise price of the warrants is $0.30 per share based on the closing price of the Company’s common stock on the grant date of $0.32. If employment is terminated, the terms of any then outstanding warrant held by the holder shall extend for a period ending on the earlier of the date on which such warrant would otherwise expire or three months after such termination of employment and the warrant shall be exercisable to the extent it was exercisable as of the date of termination of employment. Any unvested warrants shall be deemed null and void. The Company utilized the Black-Scholes method to fair value the 300,000 warrants received by the Company’s executive totaling approximately $95,000 with the following assumptions: volatility, 233%; expected dividend yield, 0%; risk free interest rate, 1.54%; and a life of 5 years. The grant date fair value of each warrant was $0.32. Effective July 18, 2014, Chris Chipman resigned from his position of Chief Financial Officer of the Company and accordingly, his unvested share of warrants were deemed to be null and void. For the nine months ended September 30, 2014, the Company recognized approximately $32,000 in equity based compensation for the vested portion of the warrants. During the quarter ended September 30, 2014, the Company reversed out the equity based compensation for the accrued but not vested portion of the warrants in the amount of $12,000 that was previously expensed in the first and second quarter of 2014. For the nine months ended September 30, 2014, the Company recorded approximately $2,449,000 in equity based compensation expense on the vested and accrued portion of the warrants issued to executives. During the quarter ended September 30, 2014, the Company issued 4,130,778 warrants in connection with the private placement of common stock equity units. See note 8 (common stock) for additional details. The following table summarizes the outstanding common stock warrants as of September 30, 2014:
|  | Number of Warrants |  |  | Weighted Average Exercise Price |
Outstanding, January 1, 2014 |  |  | 19,325,800 |  |  | $ | 0.21 |
Granted |  |  | 13,430,778 |  |  |  | 0.30 |
Expired |  |  | (200,000 | ) |  |  | 0.77 |
Expired |  |  | (200,000 | ) |  |  | 0.30 |
Exercised |  |  | - |  |  |  | - |
Outstanding, September 30, 2014 |  |  | 32,356,578 |  |  | $ | 0.24 |
Warrants outstanding and exercisable by price range as of September 30, 2014 were as follows:
Outstanding Warrants |  |  |  |  |  | Exercisable Warrants |
Range |  |  | Number |  |  | Average Weighted Remaining Contractual Life in Years |  |  | Number |  |  | Weighted Average Exercise Price |
$ | 0.01 |  |  |  | 1,575,000 |  |  |  | 2.78 |  |  |  | 1,575,000 |  |  | $ | 0.01 |
$ | 0.05 |  |  |  | 975,000 |  |  |  | 2.87 |  |  |  | 975,000 |  |  | $ | 0.05 |
$ | 0.15 |  |  |  | 7,750,000 |  |  |  | 3.05 |  |  |  | 7,750,000 |  |  | $ | 0.15 |
$ | 0.261 |  |  |  | 100,000 |  |  |  | 3.74 |  |  |  | 100,000 |  |  | $ | 0.261 |
$ | 0.29 |  |  |  | 4,130,778 |  |  |  | 4.92 |  |  |  | 4,130,778 |  |  | $ | 0.29 |
$ | 0.30 |  |  |  | 17,725,800 |  |  |  | 2.69 |  |  |  | 15,725,800 |  |  | $ | 0.30 |
$ | 0.77 |  |  |  | 100,000 |  |  |  | 0.08 |  |  |  | 100,000 |  |  | $ | 0.77 |
Unvested warrants outstanding as of September 30, 2014 were as follows:
Unvested Warrants |  |  |  |
Weighted Average Exercise Price |  |  | Number |  |  | Average Weighted Remaining Contractual Life in Years |
$ | 0.30 |  |  |  | 2,000,000 |  |  |  | 4.37 |

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